Yuan's Steepest Lures Fortis Investments

    By Judy Chen??Wes Goodman



Dec. 5 (Bloomberg) -- The yuan's record decline is attracting global money managers betting the??will prove fleeting as China spends $586 billion to boost domestic demand.



Union Investment is purchasing contracts linked to the future value of the yuan, predicting China won't let it depreciate??cause currencies across Asia to decline further. Fortis Investments, part of the Belgian financial services company, forecasts a gain of as much as 3 percent in the coming year, even as forward contracts priced in a??of 4.2 percent. The currency slid 0.72 percent on Dec. 1, the most since the central bank ended a fixed exchange rate in 2005.



"Depreciation would have a significant negative impact on other Asian currencies due to the heavy regional linkage between Asian countries??China," said Sergey Dergachev, an emerging- market money manager at Union Investment in Frankfurt, which has $233 billion in assets. "I don't think it will materialize."



Treasury Secretary Henry Paulson said today China is still committed to appreciation of the yuan over time. While some people blame yuan gains f job losses, China??the U.S. agree that a weak global economy is the cause, he said at the close of the fifth China-U.S. Strategic Economic Dialogue.



Beijing Talks



A weaker yuan may be seen as a rebuff to Paulson, who reiterated the importance of allowing more appreciation in the currency in the two-day talks with Chinese officials.



Paulson urged China on Dec. 2 to boost domestic consumption rather than rely on exports to strengthen its economy. The yuan's 0.7 percent??this week has wiped out gains achieved since the two governments last convened a meeting of their biannual economic talks in June.



Twelve-month offshore forwards contracts advanced the most at least since China abandoned the dollar peg in 2005, after Assistant Finance Minister Zhu Guangyao said today the nation will keep the yuan s??better manage expectations. Commerce Minister Chen Deming said yesterday that China is "not counting on" depreciation to help exporters.



The yuan closed at 6.8812 per dollar as of 5:30 p.m. in Shanghai,??6.8817 yesterday, according to China Foreign Exchange System. Dergachev predicts a rate of 6.87 over the next six months, delivering a profit f buyers of forward contracts.



As a managed currency, China kept the yuan little changed after the collapse of Lehman Brothers Holdings Inc. on Sept. 15 caused investors to hoard dollars??dump emerging market currencies. South Korea's won plunged 25 percent between the failure??Nov. 28, the Brazilian real slumped 22 percent??Russia's ruble fell 8 percent, as the yuan gained 0.15 percent.



"Considerable Opposition"



Non-deliverable forwards, which fell by a record 3.3 percent on Dec. 1, surged 2.6 percent today. The contracts show the yuan will decline to 7.1850 a dollar in a year.



Forwards are agreements in which assets are bought??sold at current prices f settlement at a later time. Non- deliverable contracts are settled in dollars.



"Any attempt to devalue the currency is likely to be met with considerable opposition??China's trading partners," said Simon Godfrey, who helps oversee the equivalent of $264 billion as a seni investment specialist at Fortis Investments in Hong Kong. The new U.S. administration under President-elect Barack Obama "will be less tolerant of the "crawling peg" appreciation policy," he said.



Taiwan shipped 36 percent of its exports to China last year, South Korea 25 percent??Japan 19 percent, according to UBS estimates. Companies such as Lenovo Group Ltd., China's biggest computer maker, compete with Asian rivals including Tokyo-based Sony Corp. f sales in the U.S.??Europe.



Lower Rates



China cut interest rates by the most in 11 years??announced a $586 billion economic stimulus plan last month to spur domestic demand. Global stocks??currencies rallied after the moves on optimism the world's fourth-biggest economy would remain a primary destination f exports.



The International Monetary Fund said Nov. 24 that China's economy, the biggest contribut to global expansion, will grow 8.5 percent in 2009, as the Asia-Pacific region slows to 4.9 percent. The IMF predicted the U.S. economy will shrink 0.7 percent??Europe's 0.5 percent.



The decline prompted Morgan Stanley, the New York-based bank holding company, to abandon a forecast f no depreciation. China's yuan may weaken as much as 10 percent amid "rapidly rising manufacturing unemployment," Stephen Jen, global head of currency research in London, wrote in a Dec. 2 report to clients.



"Depreciation is possible," said Chris Ruffle, who helps oversee about $3 billion of assets as co-chairman of Martin Currie Investment Management Ltd.'s China unit in Shanghai. "The export number will turn quite ugly,??the government will come under a lot of pressure."



"Can't Go On"



Export growth probably cooled to 15 percent in November, the slowest pace in nine months,??19.2 percent in October, according to the median estimate in a Bloomberg survey. The trade data may be released as early as on Dec. 10.



The yuan's 20 percent gain since China ended its fixed exchange rate mechanism in July 2005 has squeezed exporters'profits. Two-thirds of China's small toy exporters shut down in the first nine months of this year. The economy grew at a 9 percent rate in the third quarter, the slowest pace since 2003.



"We really need the yuan to fall??we can't go on," said Li Wencheng, 44, owner of Fulifeng Food Co., which makes candy f Burbank, California-based Walt Disney Co. in the Southern city of Dongguan. "Any exchange rate under 7 per dollar makes it very difficult f us to do business."



Yuan Stability



The People's Bank of China kept the yuan little changed against the dollar between July 31??Nov. 28 as it climbed 21 percent against the euro.



The yuan may weaken to 7 per dollar this year, before strengthening to 6.8 by the end of 2009, Wang Tao, an economist in Beijing f Zurich-based UBS AG, wrote in a Dec. 3 report. She said its performance will depend partly on strength in the dollar. A Bloomberg survey of 27 analysts shows the yuan will likely rise 2.6 percent to 6.7 per dollar by the end of 2009.



Obama, in remarks to the National Council of Textile Organizations published on Oct. 24, called f an end to "manipulation" of the yuan, as the U.S. trade deficit with China ballooned to a record $27.8 billion in September.



Persuading China



Paulson, a Republican, has refrained??naming China as a currency manipulat since he took office in 2006. By contrast, 15 Democrats in the House said in March the U.S. should use its influence with international agencies to persuade China to revalue its currency. Obama is a Democrat.



China's trade surplus was a record $35.2 billion in October, bringing this year's total to $216 billion, compared with $262 billion f all of 2007, the customs bureau said Nov. 11. Currency reserves are approaching $2 trillion.



"I expect the yuan to strengthen," said Rajeev De Mello, head of Asian bonds, who helps invest $586 billion of debt in Singapore at Western Asset Management Co., part of Baltimore- based Legg Mason Inc. "Exporters would like to see a weaker currency, but China is going to rely less on exporting??more on growing domestically."



Yuan forwards are his biggest holding among Asian currencies.